The Fed Stands Pat On Rates

After concluding a closely watched two-day policy meeting on Wednesday, the Fed left interest rates unchanged as expected but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation.

The Consumer Price Index, a major measure of consumer inflation in the US economy, rose 0.4 percent in August, or 1.9 percent year-on-year, according to the Labor Department.

The Fed continues to expect a further rate hike in December, with all but four Federal Open Market Committee members seeing the FFR at 1.25-1.50% or above by year-end.

Fed officials cautioned that the devastation of Hurricanes Harvey, Irma and Maria would hold back the USA economy in the "near term". But it said history suggests that the storms were unlikely to affect the national economy over the long run.

Back-to-back hurricanes that slammed into Texas and Florida-with Hurricane Jose still looming off the eastern U.S. seaboard and Hurricane Maria bearing down on Puerto Rico-also could influence Fed thinking about the timing of the next rate hike, though it is unclear in what direction.

Following this week's two-day meeting, the policymaking Federal Open Market Committee said it will start allowing a capped amount of proceeds from the bonds to roll off.

The central bank signaled the likelihood of a December increase in the updated economic forecasts it issued Wednesday. "Some say the feds have manipulated it too much and no one knows if the economy is strong enough now to stand on its own or not".

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"This gives the Fed plenty of leeway to move forward with a hike at that point without unsettling the markets", Karissa McDonough, the chief fixed-income strategist at People's United Bank, said in a note. Beginning in October, the central bank will gradually start selling its huge portfolio of Treasurys and mortgage securities that were purchased during the radical experiment known as quantitative easing (QE).

Reasons for any caution at the Fed is persistently low inflation and, indeed, the Fed lowered its inflation forecast. However, because the scale is small and the market has been expecting the increase, the rates are expected to rise only minimally.

Some analysts thought the Fed might would raise interest rates today because of Chairman Yellen's press conference. That has now changed and when the programme gets up to speed the Fed will be reducing its balance sheet by $600bn a year. After leaving its benchmark rate at a record low for seven years after the 2008 crisis, the Fed has modestly raised the rate four times since December 2015 to a still-low range of 1 percent to 1.25 percent.

Eleven of 16 Fed officials, though, see the "appropriate" level for the federal funds rate between 1.25 percent and 1.50 percent by the end of this year.

But without adding a strategy to eliminate the Fed's interest payments on excess reserves that discourage bank lending, the Fed risks tightening monetary policy to the point where at best it makes it even harder for the Fed to hit its inflation target - and at worst risks another recession.

"There are many structural drivers holding down inflation around the world and we see a benign inflation outlook across Asia". The central bank has the flexibility to adjust the pace and amount of tightening according to changes in market conditions, so investors are not too anxious about the consequences right now.

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